A little over a week ago, Sears Holdings Corp (NASDAQ:SHLD) CEO Eddie Lampert served up the best news owners of Sears stock had heard in a long, long time. He vowed to cut $1 billion in annual operational costs, and simultaneously vowed to reduce the company’s pension’s funding requirement by $1.5 billion.
SHLD stock soared on the news, of course, gaining 25% on Feb. 9 alone. After all, the struggling retailer needs all the help it can get. It remains unprofitable, and continues to post increasingly weaker sales.
If it could just get out from under the thumb of its own cost structure though, it could play offense rather than defense with the extra cash. That’s what Eddie Lampert wants you to believe anyway.
The harsh truth of the matter is though, Sears — and by extension, Sears stock — is a zombie and it doesn’t even know it.
What Eddie Lampert Said
On the off chance you’re reading this and didn’t catch Lampert’s comments, here’s the heart and soul of the new hope he whipped up a week ago:
“To build on our positive momentum, today we are initiating a fundamental restructuring of our operations that targets at least $1.0 billion in cost savings on annualized basis, as well as improves our operating performance. To capture these savings, we plan to reduce our corporate overhead, more closely integrate our Sears and Kmart operations and improve our merchandising, supply chain and inventory management.
We believe the actions outlined today will reduce our overall cash funding requirements and ensure that Sears Holdings becomes a more agile and competitive retailer with a clear path toward profitability. In addition, we believe these actions will enable us to focus our investments to drive our strategic transformation and the evolution of our Shop Your Way ecosystem through value enhancing partnerships, compelling offerings and a seamless online and in-store shopping experience for our members.”
It all sounds very compelling … at first. To those SHLD stock holders who remember that Lampert has been involved since 2004, however, and has been serving as the CEO of this dumpster fire since early-2013, have to be wondering what it is Lampert suddenly figured out between the yet-another-disastrous-quarter posted in early December and last week’s proclamation.
It’s Not Going To Work for Sears Stock
Sometimes turnarounds are nuanced, with a piece of obscured but important strategic information nobody but the company’s top insiders understand. This is not one of those times. Lampert doesn’t have $1 billion worth of expenses he can cut that won’t undermine the company’s capacity to drive the very revenue it so desperately needs.
The cost-cutting plan was relatively non-specific, though it does appear the bulk of it will be operational cuts, presumably at the same time Sears continues to sell real estate and other marketable assets. Most recently, it shed its Craftsman brand name for $900 million, though the primary M.O. for the last several years has been the sale of real property … stores.
Such sales have two ultimate outcomes, though.
First, if the company opts to continue doing business in a building it has sold to another party, it now incurs a rent expense that in most cases didn’t need to be paid before the sale.
Second, if Sears opts to outright close a store in conjunction with the sale of the building, it’s sacrifices a revenue source.
And we’ve seen both take a toll on the company as well as the value of SHLD stock. Its quarterly rent expense grew by $48 million after selling several pieces of property to Seritage Growth Properties (NYSE:SRG) a little over a year ago. Meanwhile, although same-store sales comparisons have been negative for quite some time, the closure of roughly half of its stores since 2007 has exacerbated that deterioration of revenue.
While an additional $48 million in quarterly expenses isn’t unmanageable for all retailers, for Sears, it is; every penny counts when you’ve lost $2.2 billion over the course of the last four reported quarters.
But real estate matters aside, SHLD stock will still fare no better if the bulk of its cost-containment effort focuses on operational expenses like store payroll or advertising. Most stores are already running on skeleton crews, and patrons have taken notice. If staffing levels are further reduced, there will be — quite literally — nobody around to tend the cash register.
If the operational cost cuts are instead aimed at the corporate management level, they may be slightly less painful, but not significantly so. If the expense hasn’t been called after nearly a decade of demise, how can it be feasibly cut now?
And that’s when it hits you … Eddie Lampert is just blowing more smoke to distract from the fact that Sears stock is on its last leg. If he knew how to save Sears through cost-containment, he would have done so long before last week.
To that end, it’s concerning how few people were concerned following Fitch’s math posted last month when it downgraded a swath of Sears debt. The bond-rating agency commented that Sears had “injected almost $12 billion in liquidity between 2012 to 2016 to fund ongoing operations given material declines in internally generated cash flow.”